Businesses Paid $649 Billion in State and Local Taxes in Fiscal Year 2012

Washington, 17 July 2013

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Results of 11th Annual EY/Council On State Taxation 50 State Study Analyzes State-by-State Business Tax Payments

Businesses paid $649 billion in total state and local taxes in fiscal year 2012, representing 45.2% of all state and local taxes collected during that period, according to an annual study prepared by Ernst & Young LLP in conjunction with the Council On State Taxation (COST) that was released today.

Total state and local business taxes increased by $24.4 billion, or 3.9%, during this time period. Strong growth in unemployment insurance, severance and pass-through business income taxes, coupled with moderate growth in corporate income, general sales taxes on business inputs and business license taxes, generated overall strong revenue gains at the state level.

“Business tax collections in FY2012 reflect economic growth, including strong growth in severance taxes due to increased natural gas activity. States also had higher unemployment taxes in 2012 due to the lingering effects of depleted state unemployment insurance trust funds,” said Andrew Phillips, a principal in Ernst & Young LLP’s Quantitative Economics and Statistics group (QUEST) and director of the firm’s Economic and Fiscal Impact practice.

At the state level, all types of business taxes increased in FY2012 with the exceptions of public utility taxes and business property taxes, resulting in overall state business tax growth of 5.8%. The overall growth in state business taxes was driven by strong growth in three tax categories: unemployment insurance taxes, which rose by 17.5%; state severance taxes on natural resource industries that increased by 29%; and individual income taxes on business income, which grew by 11.6%. Local business tax collections grew more slowly due to a 0.4% increase in property taxes on business property, the largest local revenue category.

“To put the 3.9% increase in business tax collections in perspective, state and local business taxes grew by an average of 8.3% per year during the economic expansion from FY2002 to FY2007,” added Phillips.

The study provides a comprehensive overview of business tax collections by state, type of tax, year-over-year changes and estimates of the total effective business tax rate (TEBTR) imposed on business activity by state and local governments. The TEBTR is measured as the ratio of state and local business taxes to private-sector gross state product (GSP), which is the total value of a state’s annual production of goods and services by the private sector. The average TEBTR across all states is 4.8%; TEBTRs range from a low of 3.3% in North Carolina to a high of 17.9% in Alaska.

The study also includes a comparison of business taxes with the estimated value of government services that benefit businesses, such as roads, fire, and police services. The study finds that, depending on the assumptions used, businesses pay between $1.16 and $3.12 in business taxes for each dollar of government services that benefit businesses.

“The state and local business tax estimates in this study provide information that should be of direct interest to state legislators as they consider major changes in business tax policy,” said Douglas L. Lindholm, President & Executive Director of COST. “One of the most notable state tax policy developments in 2013 has been the number of proposals to extend state sales and use taxes. Understanding the level of total business taxes, including sales tax on business inputs, will help inform the continuing discussions of extending the sales tax to business services and other state and local business tax policy discussions.”

QUEST is a group of economists, statisticians, survey specialists and tax policy analysts in the National Tax Practice of Ernst & Young LLP, located in Washington, DC. QUEST provides quantitative advisory services to private and public sector clients including tax policy economic studies, statistical sampling, and surveys.

COST is a nonprofit trade association based in Washington, DC. COST was formed in 1969 as an advisory committee to the Council of State Chambers of Commerce and today has an independent membership of nearly 600 major corporations engaged in interstate and international business. COST’s objective is to preserve and promote the equitable and nondiscriminatory state and local taxation of multijurisdictional business entities.

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.